The Effect of Audit Quality on Cost of Equity Capital

Abstract

The purpose of this study is the investigation of the effect of audit quality on cost of equity capital in firms listed in Tehran Stock Exchange. The cost of equity capital as part of the company's cost of capital, expected return on the common stock holders. The auditing increases the credit of required information by investors. Once information quality increases, information risk is reduced thereby reducing the expected rate of return to investors. Thus, higher quality audit can reduce cost of equity capital. The audit quality is measured by three indicators: audit firm size, auditor industry specialization and auditor tenure. In this study, data of 120 companies are analyzed for the years 2004-2011 on Panel Data basis by using the Fixed Effect Model. The result show that audit firm size has no significant effect on cost of equity capital, but auditor industry specialization and auditor tenure are negatively related to cost of equity capital. Therefore, it can be concluded that audit quality has a significant effect on cost of equity capital.

Keywords

• Audit quality
• Cost of Equity Capital
• Audit Firm Size
• Auditor Industry Specialization
• Auditor Tenure